Medical insurance inflation drivers

Although the reports do highlight the trends of healthcare costs globally, it does not explain the reasons for why healthcare cost inflation is consistently 5% higher than the Global Consumer Price Inflation. Pacific Prime's analysis in this report will review four primary drivers that can explain this 5% inflation difference.

These include the cost of new medical technology, an imbalance between the supply and demand of healthcare resources, increased compensation for medical professionals, and healthcare overutilization.

New medical technology

When compared to other industries, the medical industry is among the top in terms of demand and use of new technology. New diagnostic techniques, pharmaceuticals, and procedures are constantly being researched and developed, all of which has a cost that will eventually be passed on to patients when they are approved for public use.

For example the Fiscal Times found that, "A brand new CT scanner can run as high as USD 2.5 million. Prices are slightly higher for MRI machines, running up to about USD 3 million for a new machine." Interestingly, this article from the Hastings Center estimates that, "40–50% of annual cost increases [in healthcare] can be traced to new technologies or the intensified use of old ones."

In addition to technological advances of diagnostic tools, the development of new or improved pharmaceuticals will also influence IPMI inflation since the cost of medication is a benefit that IPMI plans will cover. As an article in the International Business Times highlights, "In the U.S., each of the nine cancer drugs approved by the FDA in 2014 will cost a patient more than USD120,000 for a year of treatment." The graph in the article shows the average cost of cancer drugs from 1965-2015 and clearly highlights that the cost is rising at what would appear to be a near exponential level. Of course, these figures are for the US, which admittedly has some of the highest costs for drugs in the world, but certain drugs can also be costly in other regions. For example, Singapore's National University found that the cost for drugs in the treatment of lymphoma averages USD 75,716 (SGD 106,234)

Finally, recordkeeping and admin-based technology like Electronic Health Records are also driving technology costs. In an article published in Medical Economics, PricewaterhouseCoopers’ Health Research Institute (HRI), "Estimates that end-to-end integration of electronic health records systems can increase operating costs by 2% for health systems." This adoption of electronic health records is now mandatory in the US and quickly becoming the norm in many other countries.

An imbalance of healthcare resources

In almost every country included in this year's IPMI report we have seen a continued imbalance in supply and demand. For example Singapore "has a high percentage of foreign workers, who currently make up 38 per cent of the total population," and the total population is expected to grow by up to 30% by 2030. This growth will come from primarily foreigners. While Singapore has a strong national health system, foreigners are generally not allowed to participate in it, which means they have to utilize the private system for medical care.

There are 14 private hospitals and centers in Singapore combine this with the fact the number of hospital beds available per 1000 people is generally decreasing in almost every country in the region - Singapore went from 3.5 beds per 1,000 people in 2003 to 3.1 beds per 1,000 people in 2013 - and it is clear to see a supply and demand imbalance: More people are going to be accessing medical care, but the number of beds available is decreasing. This will put more pressure on the private medical system which will inflate prices and therefore drive IPMI premiums higher as well.

To compound all of this the population in the countries included in this report is getting older. As an article published by the Economist in 2013 highlights, the global median age has been rising steadily since 1950 and is forecasted to do so for the foreseeable future. There is a two-fold impact that is stemming from this:

First: This means that there is an increase in the number of doctors who will be retiring. Health Leaders Media noted that in the US, "One out of three practicing physicians in the United States is over the age of 55, and many of them are expected to retire in the next 10 or 15 years. Meanwhile, U.S. medical schools have not provided for the loss of 33 percent of the nation’s physician workforce." This is echoed in countries around the world including Hong Kong where, according to Eijnsight, "Nearly 2,500 doctors, nurses, professional medical staff and other support personnel are expected to retire this year (2015) and in the next as they turn 60 years old. In the past, only about 20-30 doctors and several hundred nurses retired each year on average, suggesting that the medical profession is facing an aging crisis." Other countries like the UK have instituted new retirement laws or pension laws which according to the Telegraph will compound shortage issues, "The reduction of the lifetime pensions limit from £1.25m to £1m in 2016 will persuade thousands of GPs, consultants, and dentists to take early retirement, leaving the NHS short of crucial staff." This shortage will likely result in higher costs of healthcare in all sectors and therefore higher health insurance costs.

Second: Health insurance allows people to afford access to much better healthcare, which has no doubt had an impact on how long we live. The downside to this is that as you age you are going to need more medical care which means more claims against your health insurance. As insurers will have to cover a higher amount of risk and more costly care, you will see premiums increase.

Increased compensation for healthcare professionals

At first glance, there seems to be a disparity between the average annual salaries of trained medical professionals and the average annual salaries of other skilled professionals. As with most other things related to medicine, the US leads the way with wages, as this article on R-Street highlights, "A physician practicing in a primary care setting, according to the U.S. Bureau of Labor Statistics, earned an average of just over USD 200,000 in 2010, while specialists averaged over USD 355,000 (the highest of any professional category tracked.)"

For the vast majority of doctors, they also need to invest much more into schooling and licensing. For example the Australian Medical Association's Doctor Life Cycle chart shows that it takes at least 9 years of training to gain your Fellowship (PhD). Time is not the only investment required, as the cost to receive this training is also incredibly high. For example the tuition for one year of medicine at the National University of Singapore is SDG 135,650 (USD 97,424). For a PhD in Medicine the University of Cambridge projects a total annual commitment of GBP 20,376 (USD 31,584) per year. Once they graduate and begin practicing medicine, they are also required to pay for negligence insurance, practice fees, and even ongoing training to maintain their license, while also repaying student loans. In order to be able to do this, and to make a living, doctors require higher wages which in turn leads to a higher cost of care and insurance premiums.

Healthcare overutilization

This has become a problem seen in almost every country in the report in some form or another. For example an article in the ASCO post reported, "In 2012, an Institute of Medicine report called for better care at lower cost. The report estimated that USD750 billion were wasted each year and attributed USD 210 billion of these dollars to unnecessary care." Some of the most commonly seen examples of this are doctors ordering MRIs for people suffering back pain, or prescribing antibiotics to those with an Upper Respiratory Tract Infection (URTI) without actually testing whether the infection is viral or not (antibiotics are only effective when the URTI is not viral).

Other countries in the report are experiencing similar issues including the UAE. An article published by The National in 2012 found that members of an insurance scheme "all of whom are UAE nationals, each made an average of 14 outpatient visits last year. Expatriates with enhanced insurance averaged 4.6 visits, and those with basic coverage – the minimum required by law – made 3.1." Together, this has resulted in an increased strain on the healthcare system, which increased regulation will only compound.

How does this impact IPMI inflation? Simply put, overutilization of medical treatment on a large scale means a higher number of higher cost claims submitted to insurers. In turn, IPMI providers have offset this by increasing premiums, so if overutilization increases, you will see premiums adjust to reflect this.

For an in-depth look at the state of the cost of health insurance in 2015, please see our other report which covers 94 countries and what you can expect to pay for individual international health insurance.